Another post-Depression
record was set as insured bank failures in 1987 totaled 184, almost a one-third
increase over the previous year’s record of 138. More than half of
the 1987 bank failures and most of the assistance transactions took place
in three states: Texas, Oklahoma, and Louisiana.

Table 10-1

1986 - 1987: FDIC at a Glance ($ in Millions)

12/31/86

12/31/87

Percent
Change

Number of Bank Failures

138

184

33.33%

Assistance to Open Banks

7

19

171.43%

Total Failed and Assisted Banks

145

203

40.00%

Total Assets of Failed and Assisted Banks

$8,069.1

$9,407.0

16.58%

Losses
on Failed and Assisted Banks

$1,775.7

$2,022.8

13.92%

Losses
as a Percent of Total Assets

22.01%

21.50%

-2.32%

Assets in Liquidation

$10,856.0

$11,339.9

4.46%

FDIC Staffing

8,817

9,098

3.19%

Number of Problem Banks

1,484

1,575

6.13%

Deposit Insurance Fund Balance

$18,253.3

$18,301.8

0.27%

Deposit Insurance Fund Balance
as a Percent of Insured Deposits

1.12%

1.10%

-1.79%

Source:
FDIC, 1987 Annual Report and Reports from FDIC Division of
Finance and Division of Research and Statistics.

Notable
Events

On October 19, 1987, the Dow Jones Industrial
average plummeted 508 points, or 22.6 percent–the largest
one-day point and percentage loss in market history. On December
3, 1987, nine banks failed, the largest number of commercial
banks that had ever closed in one day. In addition, one assistance
transaction occurred on that same date.

In early 1987,
the Federal Savings and Loan Insurance Corporation (FSLIC) was
declared insolvent as of December 31, 1986, by the General Accounting
Office (GAO). In a letter to the Chairman of the Federal Home
Loan Bank Board (FHLBB), Edwin J. Gray, GAO reported the following
regarding the financial condition of FSLIC: “The accompanying
financial statements reflect a net loss of almost $11 billion
for 1986 and a deficit of more than $6 billion at the end of
1986. Troubled sectors of the savings and loan industry have
placed a severe strain on the Corporation. The average size of
savings and loan institutions that have failed and the number
of institutions receiving financial assistance or special supervisory
attention from the Corporation have steadily increased during
the last several years. From December 31, 1985, to December 31,
1986, the Corporation’s caseload of institutions in serious
financial trouble virtually doubled—from 93 to 183.”10-1

Economic/Banking
Conditions

In 1987, Gross Domestic Product (GDP) growth and employment
growth remained virtually unchanged at 2.9 percent and 2.4 percent, respectively.10-2
The unemployment rate continued to fall and was at 6.2 percent.10-3 Inflation
rose slightly to 3.1 percent.10-4 Growth
in the real estate market began to decline, with home sales falling 2.8
percent and housing starts falling
10.2 percent. The office vacancy rate remained just under 18 percent.10-5
The discount rate fell to 5.7 percent while the 30-year mortgage rate remained
at 10.2 percent.10-6

While overall
bank failures continued to rise rapidly, the number of agricultural
bank failures remained steady at 58. The proportion
of agricultural banks with negative net incomes also began to decrease,
despite a continued decrease in farmland value per acre.10-7 Total
failures in the midwest declined to 46 from 51 in 1986.

In the Southwest,
the number of bank failures continued to rise. During the year,
110 banks failed in the region, and 39 percent
of surviving banks had negative asset growth rates. That caused
the regional average asset growth rate to be negative for the second
consecutive year. Nonperforming assets peaked at 4.2 percent of
assets, as did nonperforming loans at more than 10 percent of total
loans and leases. Commercial vacancy rates soared in major Texas
cities: Austin’s was at 40 percent; Houston’s, 31 percent;
and Dallas’ was at 28 percent.10-8 Commercial real estate
loans, at 8.6 percent of assets, and Commercial and Industrial
(C&I) loans, at 11.6 percent of assets, continued to fall but
were still above the national medians of 6.2 percent and 9 percent
of assets, respectively.

The Northeast’s
real estate market, however, was very healthy, especially compared
to the rest of the U.S. Commercial real estate activity was booming,
with the number of new permits up 100 percent from 1983 in Massachusetts,
up 137 percent in Connecticut and up 87 percent in New Jersey
over the same time period.10-9 The percentage of commercial real
estate loans was at 12.1 percent of total assets in the region,
and total real estate loans were 45.8 percent of assets. In the
Northeast, average Gross State Product growth continued to increase
to 5.2 percent and was well above the GDP growth rate of 2.9
percent.10-10

The California economy also was outperforming the rest of the
country. In the banking sector, the “Big Four” banks
(Bank of America, First Interstate, Security Pacific, and Wells
Fargo) were dominating the industry. Those four banks held 72 percent
of statewide assets and earned 70 percent of total income of all
California banks. Commercial real estate loans continued to rise
to 16 percent of assets, while C&I loans fell to 19 percent.
Nevertheless, both state medians were well above the national medians
of 6.2 percent of assets for commercial real estate loans and 9
percent for C&I loans.

In 1987, money center banks started to recognize the massive losses
on their lesser developed countries (LDC) loans. For those banks,
LDC loans were 211 percent of capital, and net income to capital
was -22.2 percent. The return on assets average for large banks
(banks with assets greater than $1 billion) dropped almost 40 basis
points for the year. Chartering activity slowed a bit as 228 banks
were chartered in the year.

On August 10, 1987, the Competitive Equality Banking Act (CEBA)
was enacted. Under CEBA, qualifying agricultural banks were permitted
to amortize losses over a seven-year period for agricultural loans
and for losses resulting from reappraisal of other related assets,
rather than having to deduct the amount of loss from capital as
soon as the losses were recognized.

In November, the FDIC had adopted an interim rule establishing
eligibility requirements and application procedures for banks interested
in amortizing farm loan losses in distressed agricultural regions
of the country. By the end of the year, 20 state nonmember banks
had applied for the program: 1 had been accepted, 2 were denied,
and 17 were in process.

The total number of insured commercial banks declined to 13,703
by year-end 1987, compared with 14,199 in 1986 and 14,407 in 1985.
The number of problem banks peaked at 1,575, or 11.5 percent of
all insured banks. In 1986, there were 1,484 or 10.5 percent problem
banks, and only 1,140 or 7.9 percent problem banks in 1985.

Table 10-2 shows the number and total assets of FDIC insured institutions,
as well as their profitability as of the end of 1987.

Table 10.2

Open
Financial Institutions Insured by FDIC
($ in Billions)

Commercial Banks - FDIC
Regulated

Item

1986

1987

Percent
Change

Number

14,199

13,703

-3.49%

Total
Assets

$2,940.7

$2,999.9

2.01%

Return
on Assets

0.63%

0.10%

-84.13%

Return
on Equity

9.94%

1.15%

-88.43%

Savings Banks – FDIC
Regulated

Item

1986

1987

Percent
Change

Number

445

463

4.04%

Total Assets

$184.6

$217.1

17.61%

Return on Assets

1.04%

0.80%

-23.08%

Return on Equity

14.88%

10.17%

-31.65%

Savings
Associations – FHLBB Regulated

Item

1986

1987

Percent
Change

Number

3,232

3,159

-2.26%

Total Assets

$1,202.3

$1,285.0

6.88%

Return on Assets

0.09%

-0.58%

--

Return on Equity

2.70%

-17.24%

--

Percent change is not provided if either the latest period or the year-ago
period contains a negative number.

Source: Reports from FDIC Division of Research and Statistics.

Bank Failures and Assistance to
Open Banks

Of the 184 bank failures in 1987, 56 (30 percent) involved
agricultural banks, and of the 19 banks assisted in 1987, two were agricultural
banks. Texas, Oklahoma, and Louisiana had the most failures with 50, 31,
and 14, respectively. The average asset size of all failed banks was $34.1
million, and the average amount of insured deposits was $35.6 million. The
total dollar amount of deposits for all failed and assisted banks in 1987
was $8.9 billion, compared to $7.2 billion in 1986 and only $8.5 billion
in 1985.

Of the 184 banks that failed in 1987, 133 were resolved with purchase and
assumption (P&A) transactions. Assuming banks in those transactions paid
premiums of more than $52 million. The FDIC saved approximately $241 million
from those transactions, compared to the cost of deposit payoffs. Insured deposit
transfers (IDTs) accounted for 40 of the failed bank resolutions. The FDIC
received purchase premiums totaling $33 million from the transferee banks.
In 11 bank failures, the FDIC handled payoffs.

The FDIC provided open
bank assistance (OBA) to prevent failures in nine cases involving 19 banks
in 1987. Of the 19 banks assisted, 11 were subsidiaries of BancTexas Group,
Inc., a Dallas, Texas bank holding company that collapsed. The FDIC made
a one-time cash contribution of $150 million. The FDIC did not assume any
of the subsidiary banks’ problem assets; instead, the new investors
and managers of the new holding company were to carry out their own strategies
for dealing with such assets and for maintaining the subsidiary banks in
sound condition. The assistance transactions resulted in an estimated savings
to the FDIC of $170.4 million. The savings were estimated by calculating
the cost of the assistance transactions and comparing that cost with the
estimated cost had the banks failed.

During 1987, preliminary
approval was given to provide financial assistance to Alaska Mutual Bank
and United Bank of Alaska, both in Anchorage, Alaska, and for First City
Bancorporation of Texas, Houston, Texas. The FDIC established loss reserves
of $295 million for the Alaska banks and $942 million for First City Bancorporation.
The assistance transactions were not consummated until early 1988 and are
not included in the 19 assisted banks discussed above.

In 1987, outstanding net worth certificates were reduced by $211 million,
and at the end of the year, only three banks had net worth certificates still
outstanding for a total of $315 million.

In 1987, the FDIC broadened its 1986 capital forbearance guidelines, which
had formerly applied only to agricultural and so called energy banks, to include
any bank with difficulties primarily attributable to economic problems not
within the bank’s control. Under the Capital Forbearance Program, a bank
was permitted to operate temporarily with capital below normal supervisory
standards, provided the bank was viable and had a reasonable plan for restoring
capital. By the end of 1987, the FDIC had received 232 applications for the
Capital Forbearance Program. Of the 135 banks admitted to the program, 16 were
terminated for various reasons, leaving 119 banks in the program at the end
of the year. Applications of 56 banks were denied, and 31 were still in process.
In ten cases, the bank was closed before a decision was made on the application.

A recent estimate of losses per transaction type is shown in Table 10-3.

Table 10-3

1987 Losses by Transaction Type ($ in Millions)

Transaction
Type

Number of
Transactions

Total Assets

Losses

Losses as a
Percent of Assets

OBA

19

$2,478.1

$160.2

6.46%

P&As

133

4,431.5

1,160.3

26.18%

IDTs

40

2,144.5

586.0

27.33%

Payoffs

11

352.9

116.3

32.96%

Totals

203

$9,407.0

$2,022.8

21.50%

Source: Reports from FDIC Division of Research and Statistics.

In a Whole Bank Transaction, prospective bidders were invited to analyze a failing bank’s
assets and submit bids to purchase essentially all of the assets “as is” on a discounted basis.
The bid provided the amount the purchaser required from the FDIC to take over the failed bank;
the lowest bidder would win. The whole bank approach was regarded as advantageous by the FDIC
because the impact on the local community was softened as the failing bank’s loan customers would
continue to be served locally by a viable financial institution rather than by FDIC liquidators.
That approach also decreased the number of assets held by the FDIC for liquidation.

In 1987, the FDIC developed a new way to
handle bank failures: the “whole bank transaction,” a new approach to the P&A transaction.
A whole bank transaction was structured so that an acquiring institution purchased the maximum
possible number of a failed bank’s assets, thereby relieving the FDIC of the responsibility and
expense of liquidating the assets. In 1987, there were 133 P&A transactions. In 52 of those
situations, the FDIC attempted whole bank transactions, of which 19 proved successful.

The 1987 CEBA also extended and expanded the FDIC’s emergency interstate
acquisition authority by permitting, among other things, out-of-state holding
companies to acquire qualified failing or failed stock institutions and mutual
savings banks prior to failure provided the institutions had assets of $500
million or more.

CEBA gave the FDIC an important tool that would be used in the resolution of
some of the largest bank failures: the authority to establish a bridge
bank to assume certain deposit10-12 liabilities and to purchase certain
assets of
a failed bank at the discretion of the FDIC, if the following conditions
were met:

A Bridge
Bank was an insured national bank chartered by the Office of the Comptroller
of the Currency that had a life span of two years, with a one-year extension.10-11
A bridge bank provided a temporary solution for a failed bank. By establishing
a bridge bank under FDIC control and effecting a P&A with the bridge
bank and the FDIC as receiver of the failed bank, the FDIC had sufficient
time to evaluate the bank’s situation and to determine an appropriate
resolution. Creating a bridge bank also allowed prospective acquirers more
time to assess the bank’s condition and to make a reasonable offer
on the institution.

The cost of establishing a bridge bank did not exceed the cost of liquidation;

The continued operation of the failed bank was essential to provide
adequate banking services in the local community; or

The continued operation of the failed bank was in the best interest
of the depositors and the public.

Just two months after the
passage of CEBA, the FDIC used its new bridge bank authority for the first
time with the closing of Capital Bank & Trust Company, Baton Rouge, Louisiana,
on October 30, 1987. Capital Bank & Trust Company had total assets of
$384.4 million at the time of its failure. The FDIC determined that a bridge
bank was the most cost-effective way to preserve existing banking services
while giving the FDIC sufficient time to put together a permanent transaction.
Pursuant to CEBA, the bridge bank was chartered as a national bank, Capital
Bank & Trust Co., N.A., and a five-member board of directors was appointed
by the FDIC. By the end of 1987, the FDIC was actively seeking an acquirer
for the bridge bank.

Payments to Depositors
and Other Creditors

In the 203 banks that failed or
were assisted in 1987, deposits totaled $8.9 billion in 1,317,000 deposit accounts.
Nineteen assistance agreements contained $2.3 billion in total deposits in
over 348,700 deposit accounts. Eleven payoffs accounted for $348.7 million
in 42,000 deposit accounts. Dividends paid on all active receiverships totaled
$755.8 million in 1987.

Of the 1,216 insured bank
failures10-13 since the FDIC began operations in 1934, 687 were P&A transactions,
with 19 additional resolutions involving whole bank transactions. Deposit
payoff transactions accounted for 464 cases, of
which 80 were IDTs. There have been 46 open bank assistance transactions since
1981.

Total disbursements by the FDIC since January 1, 1934, amounted to $31.2 billion.
Of that amount, the FDIC recovered $20.4 billion, for a net loss of $10.8 billion.

Asset Disposition

At the beginning of 1987, the FDIC had $10.9 billion in
assets from failed banks. The FDIC handled 184 bank closings and acquired $5.1
billion in liquidation assets. Principal collections amounted to $2.6 billion.
At the end of 1987, assets in liquidation totaled $11.3 billion.

In 1987, the FDIC produced a national publication for investors that contained
a list of large ($500,000 or greater) commercial real estate properties owned
by the FDIC; the publication included detailed information on each parcel.
The FDIC asset marketing staff closed an unprecedented 574 sales of approximately
91,000 loans with an aggregate book value of $860 million. That was nearly
triple the 196 sales with an aggregate book value of $342 million completed
in 1986. While most of the loan sales were completed through a sealed bid process,
the FDIC also began experimenting with selling loans at public auction.

In 1987, the FDIC developed an automated program to assist asset marketing
efforts that automatically selected loans from the FDIC’s mainframe and
put the loans into sale packages with specific, predetermined parameters. Performing
loans were priced by the system; nonperforming loans were priced individually
by FDIC account officers working the loans.

The insurance fund peaked in 1987 at $18.3
billion. FDIC staffing efforts were focused mainly on bringing
the Division of Bank Supervision (DBS) up to full strength. By
the end of the year, the FDIC employed 1,909 field examiners,
with 421 new examiners hired in 1987. Total DBS staff was 2,521,
an increase of 222 over 1986. The Division of Liquidation staff
numbered 4,400, compared to 4,586 in 1986. The FDIC had more
than 400 attorneys. Total staff for the FDIC in 1987 was 9,098,
up 281 from 8,817 in 1986. Chart 10-2 shows the staffing levels
for the past five years.

Thrifts

In 1987, FSLIC conducted 17 liquidations and 30 Assisted Mergers for an estimated total cost of $3.7 billion. By the end of the year, there also had been five Supervisory Mergers. There were 25 thrifts in the Management Consignment Program, and the FSLIC fund balance was at a negative $13.7 billion. In August 1987, CEBA established a capital ratio floor of 0.5 percent for troubled but well-managed institutions whose problems resulted from economic conditions beyond their control. In February 1987, FHLBB announced it was unlikely that the Board would take administrative action to enforce minimum capital requirements. At the end of the year, FHLBB estimated a present value cost of $22.7 billion to resolve thrifts in the FSLIC caseload at that time, in addition to some thrifts in the Southwest and an allowance for 300 insolvent thrifts not in the caseload. In early 1987, the GAO declared the FSLIC insurance fund insolvent as of December 31, 1986.

The Federal Asset
Disposition Association’s (FADA) costs outpaced revenues; in 1986 FADA lost nearly $3.5 million. In the first three quarters of 1987, it lost almost $6 million. In late 1987, FADA’s Chief Operating Officer resigned.

10-1 Charles
A. Bowsher, Comptroller General of the United States, in a letter
dated May 1, 1987, as presented in a Federal Home Loan Bank Board
1986 Annual Report. Back
to text

10-2 Bureau of Economic Analysis
and CB Commercial Torto/Wheaton Research. Back to
text